The Impact of Delta Export Restrictions on Urban Water Consumption in Southern California David Sunding and Newsha Ajami

Environmental restrictions have reduced Delta water supplies available to Southern California. In the short-run, the cost of these restrictions could exceed $3 billion annually and will average nearly $470 million. With aggressive investments in conservation and other supplies, costs can be reduced to just over $150 million annually, but may still exceed $1 billion in dry years. Research is underway at UC Berkeley to improve the economic models used to calculate shortage losses to urban and agricultural consumers.

On December 14, 2007, Judge Oliver Wanger of the United States District Court for the

Eastern District of California issued an Interim Remedial Order Following Summary Judgment and Evidentiary Hearing (the “Interim Order” or the “Wanger Decision”). To protect the threatened Delta smelt, the Interim Order remanded the U.S. Fish and Wildlife Service’s (FWS) 2005 Biologi­cal Opinion on the effects of the Central Valley Project (CVP) and State Water Project (SWP) on the Delta smelt.

The Court Findings of Fact stated that the strong negative flows in the Old and Middle Rivers (OMR) and cor­responding entrainment of smelt can be mitigated by reducing diversions at the CVP and SWP export facilities. The Court Findings of Fact focused on the benefits to the pre-spawning adult smelt of reducing the winter pulse flows from the facilities and the benefits to larval and juvenile smelt of

curtailing water exports from the CVP and SWP from mid-April to mid-May.

The OMR flow targets in the Interim Order will reduce the reliability of SWP and CVP water supplies. This sec­tion of the report describes the water supply changes resulting from the court-imposed restrictions on federal and state pumping from the Delta. In this article, we focus on SWP impacts since that project is of vital importance to urban water providers in the South Coast region. Urban Southern Cali­fornia is also the region most likely to benefit from improvements in Delta conveyance such as a Peripheral Canal.

Impacts to SWP Water Supplies State Water Project base and surplus supplies were modeled by the Met­ropolitan Water District (MWD) of Southern California under two sce­narios: 1) baseline conditions, and 2) the midpoint of the high- and low-OMR flow targets in the Interim Order. The mean annual reduction in deliver­ies across all simulated years is 318 thousand acre-feet (TAF). Annual deliv­eries are reduced in nearly all years, with an average reduction of 11%.

Importantly, the Interim Order has the largest proportional impact on SWP water deliveries in near-

average years. The absolute supply loss is greatest in wet years.

Impact Model Impacts to urban water users in South­ern California are modeled using the Least-Cost Planning Simulation Model (LCPSIM), developed and maintained by the California Department of Water Resources. LCPSIM is a yearly time-step simulation model that was developed to measure the economic benefits and costs of improving urban water service reli­ability at the regional level. The primary objective of the model is to develop an economically efficient regional water management plan by minimizing the total cost of reliability management.

Total cost measured by LCPSIM is the cost of reliability enhancement plus shortage losses incurred when available supplies are insufficient to meet baseline demands. Water supply reliability can be achieved through demand reduction and through supply augmentation, includ­ing recycling, groundwater storage and recovery, and water transfers. The cost of reliability enhancement is comprised of three elements: the cost of reliability enhancements such as conservation and recycling, the cost of system operations, and the cost of buying and transferring water. The cost of unreliability is the

Table 1: Change in SWP Deliveries for Different Water-Year Types

Wet

Above average SWP Below average

Table A Dry

Critical

Avg. across all year types

Water-year Total change in

deliveries (TAF/yr) Percent change

in deliveries

-319 -10%

-414 -14%

-399 -14%

-277 -11%

-183 -11%

-318 -11%

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Table 2: Direct Economic Impacts from Reduced SWP Water Flow to the South Coast Region

Impact

Economic impact short-run

(million $)

Economic impact long-run

(million $)

Average direct impacts $467.3

Average increase in water market cost $7.2

Average shortage losses $508.6

Average increase in system operational cost -$48.5*

Average increase in cost of alternative supplies $0**

$90.3

$2.7

$46.6

-$24.7

$65.7 *The system operational cost decreases due to reduced delivery volumes. ** No alternative supplies are available in the short-run scenario.

Figure 1: Annual Short-Run Percent Shortage in the South Coast Region

welfare cost to consumers of a water shortage. LCPSIM optimizes the degree of reliability over the entire simulation period by determining the portfolio of reliability-enhancing investments that minimizes the cost of these invest­ments plus the cost of shortage in the event that demand cannot be satisfied.

LCPSIM allows for a number of con­servation and recycling investments to be made to cope with water scarcity. These investments all require capital expenditures to complete, and will take a number of years to implement. The unit costs of these investments vary considerably, and are described 45

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in detail in the LCPSIM manual. Spot water transfers from the Cen­

tral Valley are also available to address potential water shortages. For the South Coast region, we set these transfers at a maximum of 600 TAF per year in the baseline. The Interim Order impacts the potential size of the spot water market because of restrictions on through-Delta conveyance. Hence, we decreased the maximum water trans­fers to 300 TAF for the post-Interim Order scenario. While these transfer volumes are considerably higher than

Year direct transfers to MWD and Bay Area

Post-Wanger Percent Shortage Pre-Wanger Percent Shortage water agencies in recent years, note that they are theoretical limits and LCPSIM

Figure 2: Annual Long-Run Percent Shortage in the South Coast Region endogenously determines how much water to transfer to minimize costs.45

Direct impacts on urban users are 40 calculated under two scenarios which 35 we term short-run and long-run. In the

short-run scenario, it is assumed that30

water transfers and currently existing 25 storage, conservation, and recycling pro­

20 grams are available to deal with periodic shortage. In the long-run scenario, we

15 allow for investment in the full range of

10 conservation, recycling, and groundwa­ter storage options specified in the South5 Coast and Bay Area versions of LCPSIM.

0

Percent Shortage

Our rationale for distinguishing between short- and long-run impacts is

Year to highlight the central role of invest­Post-Wanger Percent Shortage Pre-Wanger Percent Shortage ments in conservation, recycling, and

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transfer/storage opportunities. While such options may be technically fea­sible, they take time to implement. In the case of certain recycling facilities or groundwater storage programs, for instance, the time required to obtain permits and build these options may be a decade or more. The Interim Order may have significantly larger costs should a drought occur before these options are constructed.

Moreover, the current legal climate with respect to water supplies in Cali­fornia is not ideal for making billions of dollars in capital investments. The Interim Order is relatively recent, and it is unclear how the Department of Water Resources and the U.S. Bureau of Recla­mation intend to deal with the associated pumping restrictions. A state program of investment in alternative conveyance in the Delta, for example, would leave many such investments “stranded” in the sense that they would not be ex post optimal. Water agencies may wait to see how events in the Delta play out before committing their ratepayers to significant investments in new recycling, conservation, and storage projects.

Results for the South Coast Region Table 2 presents a summary of the direct economic impacts to the South Coast

In this article, we focus on State Water Project impacts since the project is of vital importance to urban water providers in the South Coast region.

and frequency of water shortages, imply­ing that Delta pumping restrictions destabilize water supplies available to customers in the South Coast region.

The long-run analysis of the LCPSIM indicates that recycling and conserva­tion options can reduce the cost of the Interim Order to around $90 million annually, on average. Most of the cost under this scenario is accounted for by the investments in conservation and alternative supplies, amounting to $66 million per year. Relative to the short-run scenario, slightly less water is purchased on the transfer market. Aver­age shortage losses are reduced from $509 million to $47 million annually.

Figures 1 and 2 compare shortages in the South Coast region before and after the Delta pumping restrictions for the smelt. Without significant invest­ment in alternative supplies, shortages can reach nearly 40% in severely dry periods like the 1978–1992 drought.

The average annual impacts shown in table 2 are informative. However, the average impacts mask the significant variation in losses experienced over the simulation period. While the average annual cost to the South Coast region is $467 million in the short-run scenario, the annual impacts in the same scenario range from -$141 million to over $3 bil­lion, as shown in figure 3. Under the

region of the Delta export restrictions specified in the Interim Order. Recall

Figure 3: Annual Short-Run Economic Impacts in the South Coast Region

3,500 that direct impacts are defined as the sum of increases in supply cost and

3,000 shortage losses borne by customers.

Short-run losses from the Delta 2,500 pumping restrictions in the South Coast area average $467 million per year. The majority of this cost is in short­age losses experienced by consumers. This result is illustrated by figure 1, which shows South Coast water short­ages over the simulation period under Ec

onomic Impact (millions $)

2,000

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1,000

500 the assumption that capital investments are not available to deal with short- 0

ages and water transfers are limited to historic quantities. The Interim Order -500

significantly increases the magnitude Year

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Figure 4: Annual Long-Run Economic Impacts in the South Coast Region conservation, annual losses can exceed $800 million during a very dry period.

3,500 Researchers at UC Berkeley are continuing to work with the state and

3,000 federal water users receiving Delta exports to refine estimates of the eco­

2,500 nomic impacts resulting from protec­tion of the Delta smelt. In particular,2,000 we are working to improve our under­

1,500­ standing of urban water impacts by developing an alternative to the state’s

1,000 LCPSIM model. Based on MWD’s inte­grated resource planning platform, the

500 model will be more disaggregated than LCPSIM, which assumes frictionless0

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long-run scenario the annual impacts ranges from -$160 million to $839 mil­lion, while the average annual cost to the South Coast region is $90 million (figure 4).

It is important to note that the timing of economic losses resulting from pumping restrictions do not match the timing of the associated water supply losses. That is, proportional and abso­lute supply losses are largest in above-average water years. Yet, economic losses

Delta pumping restrictions will destabilize urban

water supplies in Southern California, and have the

potential to cause billions of dollars in annual losses.

from the Wanger Decision are largest in dry years. What explains the differ­ence? Recall that LCPSIM is a dynamic simulation model that captures the sequence of additions to and subtrac­tions from storage (both reservoir and groundwater storage). Environmental restrictions that reduce wet-year water supplies have the effect of reducing addi­tions to storage, the consequences of which are felt in dry years when agencies make withdrawals from storage. This observation highlights the importance

of using a dynamic model to measure the impacts of Delta export restrictions.

It is likely that the economic impacts calculated by LCPSIM understate the true economic costs of Delta pumping restrictions. As discussed earlier, a main feature of LCPSIM is that it is highly aggregated, meaning that nearly all of Southern California is treated as a single region. Within the region, LCPSIM essentially assumes that water is allo­cated efficiently, for example by a fric­tionless water market. This assumption is not very realistic, and future research will disaggregate the Southern California region into actual water utilities.

Conclusions This analysis highlights the additional risk on California’s water system that results from pumping constraints designed to protect the Delta smelt. If hydrologic conditions are unfavorable, the resulting Delta export reductions would impose large costs on the South Coast region. With current levels of conservation, recycling, and storage, the estimated annual impacts of Judge Wanger’s Interim Order exceed $3 bil­lion during a prolonged drought. Even with significant new investments in alternative supplies and additional

water allocation among agencies in the South Coast—an obviously unrealistic assumption. While not discussed in this article, we are also working to improve our understanding of agricultural water use and are working with Delta exporters to develop a new generation of agricultural impact models that can more accurately capture the value of water supply reliability in agriculture.

David Sunding is the Thomas J. Graff Professor of Natural Resource Economics in the Department of Agricultural and Resource Economics, UC Berkeley, and Co-Director of the Berkeley Water Center. He can be contacted by e-mail at sunding@are.berkeley.edu. Newsha Ajami is a post-doctoral researcher at the Berkeley Water Center. She can be contacted by e-mail at aajami@berkeley.edu.

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